WHAT IS FATCA?

FATCA or the Foreign Account Tax Compliance Act, is actually a section of the Hiring Incentives to Restore Employment (HIRE) Act passed into United States law in March 2010, that comes into force on 1 July 2014. It is unique in its extra-territorial reach, being an attempt to force financial institutions (“FIs”) worldwide to report on their U.S. tax resident accountholders and imposing sanctions for non-compliance. The starting point is that all non-U.S. FIs should be forced to register with and identify their U.S. tax resident accountholders to the IRS or face a 30% withholding tax on gross payments from U.S. payors.

WHAT IS THE CAYMAN IGA?

The Cayman IGA or Inter-Governmental Agreement between the Cayman Islands and the U.S. is an agreement to introduce domestic legislation in the Cayman Islands requiring certain FIs to report U.S. tax resident accountholders to the Cayman Islands Tax Information Authority (the “TIA”), which will then pass that information to the IRS. By virtue of this IGA, FIs in the Cayman Islands are not required to enter into separate agreements with the IRS and will report to the TIA instead of the IRS.

WHICH CAYMAN ISLANDS ENTITIES ARE AFFECTED?

Only certain categories of Cayman Islands FIs are directly affected by the reporting requirements. Other entities will only be affected indirectly, for example, by the need to provide additional information when opening accounts with FIs.

Four categories of Cayman Islands FIs (“Reporting FIs”) will be required to report their U.S. tax resident accountholders to the TIA:

  • Custodial Institutions – any FI holding financial assets for the account of others.

  • Depository Institutions – any FI accepting deposits in the ordinary course of banking or similar business.

  • Investment Entities – most investment funds (other than certain regulated funds with restricted categories of investor and most pension funds), administrators and some advisors/ managers.

  • Specified Insurance Companies – insurers liable under certain cash value insurance and annuity contracts.

Some FIs that would otherwise be Reporting FIs are exempted, including, for example, certain small and/or local FIs and FIs with a sponsor that has registered with the IRS and is reporting on their behalf.

Importantly for the liquidators of Reporting FIs, there is no exception for Reporting FIs that are in liquidation.

WHAT IS A REPORTING FI REQUIRED TO DO AND BY WHEN?

  • Register for a GIIN

By 1 January 2015 – Register as a Registered Deemed-Compliant FFI on the IRS FATCA Registration Portal to obtain a global intermediary identification number (“GIIN”). By virtue of the Cayman IGA, all Cayman Islands Financial Institutions are exempt from FATCA withholding tax from 1 July 2014 (when it commences) until 1 January 2015. From that date, they will not suffer withholding by U.S. payors if they can provide payors with a GIIN.

  • Perform due diligence on accounts existing at 30 June 2014

Due diligence can be performed by the Reporting FI or delegated to a third party. Liquidators of an investment fund, for example, could therefore engage the services of the fund’s administrator  to review the files that are already on the administrator’s system.

Small accounts (up to $50,000 for individuals and up to $250,000 for entities) are exempted from the due diligence requirements unless they later become higher value accounts (which should be unlikely where the entity is in liquidation).

Individual accountholders: generally, so long as the Reporting FI’s electronic databases reveal the following information, it will only be necessary to review electronically searchable data for indications that an accountholder is a U.S. tax resident (“U.S. Indicia”):

  • Nationality or residence status

  • Current residence and mailing addresses on file

  • Current telephone number on file

  • Any standing instruction to transfer funds

  • Whether there is an “in-care-of ” or “hold mail” address

  • Whether there is any power of attorney or signatory authority

If the electronic databases do not reveal all this information it will be necessary to review the paper files for accounts over $1 million.

U.S. Indicia can generally be overridden by contrary self-certifications or other evidence.

The review should be conducted by 30 June 2015 (or by 30 June 2016 for accounts up to $1 million).

Entity accountholders: the first step is to review the AML/KYC files (and for FIs, the GIINs on the published IRS list of foreign FIs) to determine if the accountholder is one of the following:

  • U.S. tax resident
  • Non-U.S. entity controlled by U.S. tax residents (if the account is over $1m, also obtain self- certification as to identity of controllers).
  • Nonparticipating FI (i.e. an FI that hasn’t entered into an agreement with the IRS when it should have or is in breach of its reporting obligations)

The review should be conducted by 30 June 2016.

  • Report to the TIA

Reporting FIs will be required to report the identity and account balance or value at year end of accountholders identified by the due diligence process as being (i) U.S. tax residents or (ii) non-U.S. entities controlled by U.S. tax residents. Accounts of Nonparticipating FIs are not themselves reportable, but any payments to Nonparticipating FIs are reportable.

With respect to reportable accounts identified in 2014 only basic information about the accountholder and account balance or value is reportable. For 2015 additional information on gross income paid or credited to custodial and depository accounts is required, and for 2016 information on proceeds of property sales or redemptions paid or credited to custodial accounts is also required.

For 2015 and 2016 Reporting FIs must also report the name of any Nonparticipating FI to which it has made payments and the amount of such payments.

The required timing of these reports will be set out in the Cayman Islands legislation implementing the Cayman IGA, but since the Cayman IGA requires the TIA to provide the information to the IRS within 9 months of the relevant year, Reporting FIs will presumably have a shorter period to file reports with the TIA.

IS THE U.S.THE ONLY JURISDICTION TAKING THIS APPROACH?

The Cayman Islands has also entered into a similar IGA with the U.K. The U.K. IGA contains broadly similar due diligence and reporting obligations with respect to U.K. tax residents, although the criteria for identifying U.K. tax residents are narrower (since the U.K. does not tax its non-resident citizens) and there is no threat of withholding tax for non-compliance.

WHAT STEPS SHOULD BE TAKEN NOW?

Liquidators of Cayman Islands entities where the liquidation is likely to continue beyond 2014 are advised to take the following steps during the course of this year:

  • Identify whether the entity will qualify as a Reporting FI.

  • Identify whether the entity could potentially suffer FATCA withholding tax – i.e. will it have any income paid directly or indirectly from a U.S. payor.

  • If the entity is a Reporting FI that may receive income from a U.S. payor:

    • Register the entity on the IRS FATCA Portal to obtain a GIIN.

    • Assess whether the entity’s electronic records would include all U.S. Indicia obtained from accountholders (and if so, whether similar indicia for U.K. tax residents would also be included).

    • Determine methodology for due diligence (e.g. conduct in-house or outsource).

    • Prepare to commence due diligence process after 30 June 2014.

Note that if the liquidation commences after 30 June 2014, the entity may have accounts opened after that date to which the due diligence requirements noted above will not apply. The entity should have obtained self-certifications and other documents upon the opening of such accounts to determine whether such accounts are reportable. If this is not the case, steps should be taken to obtain such documents otherwise the accounts could automatically be reportable.